Are utility bills an expense or a liability?

Because of double-entry accounting and the accrual-basis of accounting, the cost of utilities (electricity, natural gas, sewer, water, etc.) will involve both an expense and a liability. For example, a retailer who is responsible for her store's heat and light will incur an expense for the amount of utilities used during the accounting period. The retailer will also have a liability for the utilities that were used but have not yet been paid. Since the utility company provides the electric and gas service before it bills the user, the retailer will be incurring an expense every day and will be incurring a liability every day. The amount of the liability increases each day and is reduced by the amount paid by the retailer. (When the retailer pays the amount billed by the utility for the previous month's usage, the retailer will still have a liability for the utilities used since last month.)

For a manufacturer, the cost of the utilities used in the factory will be assigned or allocated to the products as manufacturing overhead. If all of the products manufactured remain in inventory, the cost of the utilities used in the factory are embedded in the inventory's cost. When products are sold, the cost of utilities allocated to those products will automatically be expensed as part of the cost of goods sold. Under accrual accounting, the cost of the utilities that were used are included in the products' cost—whether or not the utilities have been paid. Because of double-entry accounting, the amount owed for the utilities that were used is also reported on the balance sheet as a liability.

Since natural gas, electricity, and other utilities are used before the meters are read and billed by the utility company, the company using the utilities will have to estimate (1) the amounts used during an accounting period, and (2) the amounts owed at the end of each accounting period. The amounts are entered into the accounting records through an accrual-type adjusting entry.